When was the last time you gave even a passing thought to the third party rights clause in one of your contracts? Perhaps you have never done so. The High Court recently had a rare opportunity to consider the application of such a clause when asked to decide on a preliminary issue in the case of Hurley Palmer Flatt Ltd v Barclays Bank plc [2014] EWHC 3042 (TCC). The result of this review is that limits have been applied to the contractual “rights” that a third party is entitled to enforce, something that everyone who regularly enters into contracts should be aware of.
For good commercial reasons the law has been uncomfortable with the terms of a contract being enforced by anyone who is not a party to it, even if the contract that was made specifically for their benefit. The unjust results that this sometimes gave rise to and the proliferation of collateral warranties to fill the gap became of sufficient public concern that Parliament responded and The Contracts (Rights of Third Parties) Act 1999 was the result.
In general terms, the Act allows a third party the right to enforce a term of a contract if the contract expressly provides that he may, or if the term purports to (and is intended to) confer a benefit on him. The right is limited to parties who are expressly identified in the contract either by name, as a class or as answering a particular description (although the party does not need exist at the contract is entered into). The right is subject to all the other relevant terms of the contract.
Barclays Bank plc (BBP) was a third party expressly identified as having rights in the contract between Barclays plc and Hurley Palmer and Flatt (HPF). BBP attempted to use this position to instigate the adjudication proceedings. Its right to do this was challenged, successfully, by HPF.
The wording of the third party rights clause in HPF’s appointment was:
“Any Affiliate with a direct interest in the Project shall be entitled to enforce the terms of this Agreement as ‘Client’ always provided that the Consulting Engineer shall be entitled [to] rely on the equivalent defences in respect of such liability which it has against the Client.”
BBP qualified as an affiliate.
When deciding what the scope of the right to enforcement given to the third party by this clause was, the court determined that the agreement contained two sorts of terms. ‘Substantive’ terms that give rise to a potential liability between the parties and ‘procedural’ terms that give rise to the right for the parties to take action.
The wording of the clause was then interpreted to mean that it was the substantive rights not the procedural ones that the third party was intended to be able to enforce. Because the right to initiate adjudication proceedings was held to be a procedural term BBP, as a third party, was not empowered by the clause to enforce that term.
The court then considered whether the contractual right to adjudicate is one that would ever be capable of being invoked by anyone other than the parties to the contract (e.g. by a differently drafted clause). It appears to have concluded that it would not because of the nature of adjudication (being a right between “parties” to a construction contract) and the specific wording of the Act.
This is a High Court decision and will therefore be subject to any future decision of the Court of Appeal or Supreme Court. For the present though it appears that if a third party wishes to give itself the option to enforce 'procedural' terms in a contract, clear drafting of the third party rights clause will be required. However, even this will not be sufficient to give it the right to initiate adjudication proceedings.
This decision is likely to have an effect on how third party rights clauses are drafted so it would be worthwhile paying them a bit of attention in future.
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